Where do I go from here?

Question

I found a two unit house in MA that I want to completely rehab.  I would live in one unit and rent out the other.  I can easily afford the mortgage with 20% down but that would eat up all my cash so  I'm unsure how to finance the rehab.  I don't want to make an offer without knowing that I'll be able to afford it.  Just ball-park, off the cuff, no reason for this number, I'm guessing it will take 200K to rehab.  I obviously want to bring a contractor in to take a look and give me a better estimate but again, I don't want to proceed if I'll be unable to purchase.

Where do I go from here?  Can I make an offer in order to get a contractor in?  Can I just request a second showing with a contractor (but I would want more than one contractor estimate) and I would want to act quickly in order to secure the property.  I know of a 203k loan, are there other types of financing available for this type of project?

Thanks so much for the help

Shaun Reilly · Answer

First off $200K sounds insanely high for the rehab if there is pretty much anything salvageable in the place.  What do you think needs to be done?  I guess where is it as well, I'm thinking Haverhill since that is where it says you are from but a different area could command higher prices, though still unlikely that much.

Unless it is a place a lot of investors are putting in high cash, no contingencies offers on your best bet is probably the FHA 203K loan.  Funds the purchase and the rehab and you only need to put down 3.5% total (But you can do as much as you want).  So if you are worried about eating up all your capital with the down payment you can get in cheaper, finance the rehab and keep a sizable reserve fund.

BTW that might really be your only option.  While I doubt the place needs $200K of work if it even needs 25% of that there is a good chance it won't qualify for a conventional purchase mortgage.  And since you want to live there many investor options (Which are way to expensive if you can work on getting a 203K loan) won't be options since most HMLs won't do an owner occupied property.

Marcus Auerbach · Answer

@Nicole BrushThe big question that I am missing here: is it a good deal? I would not worry about how to fund a deal until you can answer the question.

If you ad up your purchase price plus your 200k rehab cost, how does that compare to ARV - after repair value? You should have at least 20-25% expected profit built in. Your realtor can help you with ARV - ask for a conservative estimate.

So, lets say you pay $400.000 and rehab for $200.000 (including your holding cost for probably half a year at least) your cost is $600.000 - your ARV better be $720.000 or more.

Typically you do the math the other way arround to determine your maximum purchase price. Keep your offer about 10% below your max purchase price, if you get it for this price you have an additional cushing to ofset risk.

The old saying is that if the deal is good, the money will find it.

Nicole Brush · Answer

Wow, thank you so much for all the advice, I appreciate it so much.

Two questions:

1.  Is the down payment based on the selling price plus the estimated rehab costs or just the selling cost?

2.  Is there a way to find out (without making a million phone calls) who would finance a HomeStyle loan.  I'm trying the Google but I'm not having much luck.

Thank you all!

Jonathan Key · Answer

@Nicole BrushI would say you have 2 options...well 3...no 4!

1) Put the 20% down and be okay with taking several years to rehab while living there.

2) Put 5% down and get the rehab going on the half you want to rent using the 15% leftover. At least then you may have some cash flow to help finance the side you are living in.

3) Get a HML and fast track the whole thing while living elsewhere. *note* have a really good plan - this option can get expensive really quick.

4) Find a better deal where you are not so stretched.

Let us know what you do!

Marcela Correa · Answer

@Nicole Brush

Oh...and schedule access with a realtor for a whole morning or afternoon and schedule contractor site visits back to back. Your 203k lender can provide the names of several contractors that they recommend. Some people schedule them to be in simultaneously to save time but I think you miss the opportunity to get mode feedback on the property and the renovations, ask multiple times the number of questions, and create a rapport that could lead to a discount later on.

Marcela Correa · Answer

HI Nicole,

Fannie Mae has a renovation loan that's similar to the 203k called HomeStyle. It allows you to roll in mortgage and rehab. It requires a higher downpayment than the 203k but I believe there is no PMI. Not many banks are doing it but you can find parameters on the loan online and then you can call around to banks to see if any of them are carrying the product.

Shaun Reilly · Answer

Okay yeah you will probably get charged more in Newbury than in Haverhill is you are using local guys.  That also does on the surface sound like an extensive and expensive project.

I'll still hold that you should not be that close to $200K if there is much that is still usable past what you said.

Also keep in mind that even if you plan on staying there a long time and do up your unit pretty nice you don't have to do the same on the rental.  Not sure what the rental market in Newbury is like but unless every place has granite and high end fixtures don't do that in yours.  The name of the game is high quality, long lasting, aesthetically pleasing but economical for a rental.

Good luck!

Kyle Gregg · Answer

dont forget to '@' people so they can get updates when they are mentioned @Nicole Brush

Kyle Gregg · Answer

I would reach out to a local lender that is experienced with 203k loans and get pre qualified. Thats a good starting point to figure out how much you can spend/afford. From there, your lender can provide a approved licensed contractor and a HUD consultant who will inspect the property and will write up a scope of work and a bid for the rehab.

I would definitely look into a 203k since you are only putting down 3.5% on the purchase price of the property and financing the property and rehab at a decent rate around 5%. I dont see an easier way in!

Nicole Brush · Answer

Thank you Shaun,

The property is in Newbury, MA.  It's a very large property, built in 1850 and does need a lot of work -- insulation, windows, etc.  In doing the rehab I would probably do an all new kitchen, bathrooms, and add on a master bath.  The electric is updated (no knob & tube) and the foundation has been improved but still may need some work.

Where do I go from here?

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